The Shandong plan appears to be part of China's initiative to strengthen its sprawling system of state-owned enterprises. The plan also dovetails with other initiatives to create competitive grain-trading companies, promote "indigenous innovation" in seeds and animal breeding, and to overhaul the grain reserve system.

Luliang Grain Group (鲁粮集团) will be created by merging 19 enterprises now under the administration of the Shandong Province Grain Bureau. The company's business will encompass the whole supply chain, holding reserves, processing, and distribution. The seed group will be created by merging 78 enterprises under the provincial academy of agricultural sciences. The other four companies will consolidate enterprises under the provincial water management bureau, minerals bureau, academy of science, and coal field bureau. In all, 221 enterprises will be merged into six "first tier" state-owned enterprises. The formation of the companies is due to be completed by the end of October.

The grain company was described by a provincial official as having a relatively strong foundation with a high degree of market orientation. On this basis, the company will have a high degree of independence from its grain bureau overseers. Each company will decide on the degree of independence from bureaucratic managers based on its situation.

The new companies will have a mix of commercial and public functions. The companies under research institutes will get favorable tax treatment because they have to bear teaching responsibilities. The grain company will hold provincial grain reserves while also functioning as a commercial trader and processor.

Shandong has 616 state-owned enterprises under 44 departments with 84.3 billion yuan in assets and employing over 41,000. Another 98 enterprises in Shandong province will be closed because their debt-asset ratio was too high. The bureaus overseeing the enterprises slated for closure will have to decide how to dispose of the assets.

The destroyed transgenic corn fields were discovered in three provinces that are centers for seed breeding and propagation: Xinjiang, Gansu, and Hainan. Presumably, the corn was being grown to be sold as seed. No genetically modified corn seeds have been approved for commercial production in China. Certain varieties of genetically modified corn produced in other countries have been approved by Chinese officials for import (but not for planting in China).

Attention was drawn to the widespread illegal planting of genetically modified corn by a Greenpeace report released late in 2015 which claimed to find genetically modified material in over 90 percent of corn samples taken from fields, seed shops, and markets in Liaoning Province. A China Dialogue article said the source of the seeds was "a mystery" and quoted a Chinese crop scientist who alleged that illegal planting of genetically modified corn had been commonplace in Liaoning Province for a decade with little enforcement or regulation. The recent Ministry of Agriculture announcement did not mention finding any illegal corn in Liaoning or other major corn-producing northeastern provinces.

The Ministry of Agriculture announcement promises strict checks for transgenic corn during key periods of spring sowing and fall harvest. They will strictly regulate test plots, distribution, and seed production areas, and take samples from seed shops. The Ministry says Liaoning Province launched an enforcement program this year jointly conducted by the provincial agriculture commission, police, and the industrial-commercial bureau. They have discovered three cases of illegal genetically modified corn seed this year, and the Liaoning officials promise to trace the seeds to their source and severely punish the perpetrators.

Premier Li interviews Farmer Mao, showing his concern about farmers who are likely to face plunging prices this fall.

The stylized "leader-meets-peasants" theatrical play was pulled out of the communist party propaganda playbook to assure farmers that the party still cares about them, and will do something about plunging prices. Perhaps it also gave Premier Li something to do, since General Secretary Xi has taken control of nearly every responsibility in Beijing.

Farmer Mao Laohan explained that the nice-looking rice field belongs to his little brother's family. In response to Premier Li's query about how much he could sell his rice for, Farmer Mao said about 100 yuan per 50kg, which he described as "very cheap." Premier Li went on to ask whether the price at the local granary was the same as the market price (the answer was not reported in the article).

The reporter recalled that Premier Li had earlier this year answered a question on agricultural subsidies by promising that "the State's support for farmers will not decrease, and support for farmers will not decrease."

Premier Li went to a village that evening to learn the farmers' "real understanding of government policies." The Premier was not afraid to get his shoes wet as he went into the fields for his "special investigation." He asked farmers the price paid for grain purchased for government reserves, how they felt about the price, and whether they could cover their costs. Again, the answers were not reported. The Premier's questions were important; the answers were inconsequential.

Upon completing his interview, he assured the farmers, "Don't worry, the State will think of a way to preserve the enthusiasm of all people who plant grain."

As he returned to his car, Premier Li remarked to his coterie of accompanying officials, the next step must be to improve the grain distribution system and preserve the income of farmers.

No clues were given about what concrete measures might be considered. However, on the same day as Premier Li's inspection (what a coincidence!) Peoples Daily reported that the Ministry of Finance is ready to spend more money on subsidies to prevent farmers from losing money, this time citing promises by General Secretary Xi Jinping that the State will not fail to protect farmers from losses. The article lauded pilot programs for soybean and cotton target price subsidies, and promised that much larger subsidies would be given this year for these programs. The article also promised that a new subsidy for corn producers will be rolled out this year, and the government will budget 39.4 billion yuan ($6.1 billion) for intergovermental transfers to major grain-producing counties to ensure that farmers' incomes will increase.

Peoples Daily assured readers that agricultural subsidies are part of a national effort by the government to strengthen agriculture and benefit farmers.

It sounds like the leadership is making a pre-emptive move to assure farmers before fall crops come on the market and depress prices.

Saturday, August 20, 2016

China's soybean subsidy has been partly based on fictitious prices reported by idle factories, according to investigations by a Chinese journalist.

Since 2014, China has been piloting a "target price" subsidy for soybeans which makes a payment to producers based on the difference between the average market price and a target price high enough to give farmers a reasonable return. The lower the market price, the bigger the subsidy payment. To determine the market price for calculating the subsidy, a sample of soybean processors were selected by authorities to report the prices they pay for soybeans twice a week during the six-month marketing season after the harvest.

According to "Economy Half Hour" on China's Central Television network, a journalist called companies in Heilongjiang who reported soybean prices to authorities, and found that many of them did not actually purchase any soybeans because they were idle or out of business. For example, one such company chosen as a price collection point, Xiang River Fats and Oils, had been closed since 2014 when the target price pilot started. The company official asked around to find out what price he should report to the government.

The journalist tried to contact all 53 price-reporters on the list for Heilongjiang Province with the help of the vice chairman of the provincial soybean association. They were able to contact 33, and found that over one-fourth of the names were "zombie companies" that were out of business one or both of the last two years when they were supposedly reporting prices.

List of companies reporting soybean prices: those highlighted in yellow have been out of business for two years; pink ones have been idle for a year.

The reporter also found that the price-collection points did not reflect the geographic distribution of soybean production. Authorities chose three soybean price-reporters per county without regard to the volume of soybeans produced there. The top county that produces 17 percent of Heilongjiang's soybeans had three reporting companies, the same as small producing counties. The average price for the province was apparently calculated without weighting based on the counties' volume of production. This procedure tends to overstate the average price received by farmers, since prices are lowest in major production areas.

Experts from the provincial soybean association, Ministry of Agriculture, and Academy of Social Sciences said the many "loopholes" in the procedure mean that the "official data" used to calculate the subsidy does not reflect the actual situation in the market. The amount of the soybean subsidy varied widely across the four provinces during its first year in 2014, and farmers appear unhappy with the amount of the subsidy. The journalist interviewed a farmer in China's leading soybean county who used to rent out his land for others to grow soybeans while he went to work in the county city. Now no one wants to rent his land because the subsidy is not enough to make soybeans profitable, he says. His equipment is in disrepair and he claims to have no cash to buy inputs to farm the land himself.

The TV report left some questions unanswered. The status of the 20 reporting companies they were unable to contact is unclear. Did the journalist find that one-fourth of the companies he contacted were idle, or did he find that one-fourth of the companies on the list were idle? Did the "zombie" companies actually report prices twice a week for six months? The investigation was apparently conducted in the spring but has been posted online four months later (it's unclear when the broadcast appeared on TV).

The investigation was enabled and probably invited by the soybean association, which is dissatisfied with the size of the subsidy. The subsidy money provides the leverage for journalists to poke around in China's antiquated statistical system and expose flaws that may be pervasive throughout the statistical system. China's Price Bureau has used a similar reporting system to collect retail and wholesale food prices and farm production costs from three reporters in various locations for decades. The National Bureau of Statistics is more sophisticated, but its statisticians also need people looking over their shoulder to ensure that surveys are collected from representative samples, that data is properly weighted, and that numbers are reported truthfully and accurately. Nearly all of this work is conducted out of the public eye. Subsidy money could be the lever that finally brings transparency and improvements to China's statistics.

Sunday, August 14, 2016

China's State Council endorsed R&D and commercialization of genetically modified crops as one of the priorities in its 13th Five-year Plan on Science and Technology. The document emphasized dual objectives of putting China on the forefront of scientific research while maintaining the strictest approval process for genetically modified organisms (GMOs).

The GMO endorsement was a small part of a lengthy Five-year Plan for Science and Technology (2016-2020) which projects a broad vision of transforming China's economy from one that cranks out products using imported technology to an economy that runs on innovation. The plan emphasizes dual priorities of using science and technology to maintain national security and to move up to a higher rung in global value chains. Research and development on genetically modified crops is the eighth of 13 priority projects identified in the plan. Other priorities include space exploration, super computing, and new-generation broadband wireless communication. The Plan is described as an important to achieving the "all-round well-off society" and the "China Dream" of the great revival of the Chinese race.

The agricultural GMO project prioritizes research on crops resistant to drought, pests, disease, and cold. It calls for strengthening transgenic research capacity for cotton, corn, and soybeans, and for commercializing pest-resistant cotton and corn and herbicide-tolerant soybean varieties. Research on food crops--rice and wheat--should concentrate on traits that don't affect the endosperm. The plan endorses genetic modification, cloning, gene editing, and "other new-type technologies."

This does not imply that China will be importing seeds; to the contrary the plan implies that GMO seeds will be supplied by Chinese companies. A specific priority in the S&T plan is "indigenous innovation" in Chinese breeding and molecular design, with a focus on agricultural plants, animals, micro-organisms, and trees "in support of national food security."

The plan fleshes out the January "Number One Document's" instructions to "strengthen research capacity in agricultural transgenic technology and supervision on the foundation of food security." In a press conference, State Council advisor Han Jun explained that a country feeding 1.3 billion people can't afford to be out of date and needs to seize the high ground in agricultural biotechnology research. Han also stressed that China would adopt the world's strictest safety evaluation and approval process for GMOs. "Bold in research; cautious in approval" is the catch-phrase intended to encourage eager scientists and seed merchants while reassuring skeptical Chinese consumers.

China's Xinhua News Service said the five-year plan is the latest in a series of signals that China needs to build up a set of genetically-modified varieties protected by intellectual property rights; and strict safety measures must prevent illegal planting and propagation of GMO crops. A Ministry of Agriculture official said commercialization of GMOs will be prioritized in three groups: non-food crops first, then "intermediate" crops (for feed and industrial processing), and finally food crops. One academician told Xinhua that China's approval process for agricultural GMOs will be the strictest in the world. Ministry of Agricultural officials assured the public they would carry out "dragnet" investigations at spring planting and fall harvest to prevent illegal planting, propagation and marketing of unapproved GMO crops. The Xinhua article notes that many details are still unclear about how research and development and approval will work. One scientist acknowledged that a defect in the plan to commercialize genetically modified corn is that China has no such varieties close to commercialization.

Beijing Commerce News said the five-year plan opens the door to a huge market for genetically modified seeds in China. A China Academy of Science scientist said that conventional breeding techniques had reached their limits, and genetic modification is the most scientific and most efficient method for breeding available now. This article repeated concerns about building a strict supervision system to keep up with research capabilities and emphasized the role of labeling regulations to ensure consumers' "right to know" and "right to choose."

Thursday, August 11, 2016

China will produce more corn than it consumes again during 2016/17, according to the latest supply and demand estimates from China's Ministry of Agriculture (MOA). Estimates of Chinese corn prices have been revised downward, and MOA expects drawdowns of Chinese soybean and cotton stockpiles to cut into imports of those commodities.

This week, MOA released its second monthly "CASDE" (China Agricultural Supply and Demand Estimates) which includes balance sheets for corn, soybeans, cotton, vegetable oils, and sugar. The report excludes rice and wheat.

The August report increased the estimate of the 2016 Chinese corn crop to 216.5 million metric tons, up 2 mmt from the July estimate based on good weather that is expected to bump up the yield. Estimates of feed and industrial consumption of corn for 2016/17 were also increased, stimulated by falling prices in China. The estimates of corn prices for both 2015/16 and 2016/17 were revised downward from last month, as well. China's corn imports are expected to fall to 2.4 mmt in 2016/17. Corn prices are expected to be in the 1500-1650 yuan/mt range, down about 200 yuan from 2015/16.

China
corn balance sheet (China Ministry of Ag, August 2016)

Item

Unit

2014/15

2015/16

2016/17

Change from last month

Sown area

1000 HA

37,123

38,117

36,026

Yield

KG/HA

5,809

5,892

6,010

58

Production

Mil MT

215.70

224.58

216.51

2.24

Imports

Mil MT

5.52

4.60

2.40

Consumption

Mil MT

183.39

193.35

208.17

1.19

--food

Mil MT

7.52

7.65

7.72

--feed

Mil MT

112.56

120.61

132.68

0.69

--industrial

Mil MT

52.57

53.97

56.35

0.50

--seed

Mil MT

1.69

1.66

1.61

--waste and other

Mil MT

9.05

9.56

9.81

Exports

Mil MT

0.01

0.03

0.20

Inventory change

Mil MT

37.82

36.00

10.38

0.89

While China's corn output will be less than last year, MOA expects China's corn inventory to increase again during 2016/17. The expected surplus of 10.38 mmt will be less than the 37.82 mmt surplus in 2014/15 and the 36 mmt surplus estimated for 2015/16. The estimate of the surplus for 2015/16 was revised downward this month due to progress in auctioning corn reserves. MOA expects a reduction in DDGS imports due to anti-dumping duties, which will "increase the value" of domestic DDGS and increase corn used for alcohol processing. MOA thinks domestic corn prices will fall below the C&F price of imported corn during 2016/17.

China corn prices (RMB per metric ton)

Description

2014/15

2015/16

2016/17

production areas

2266

1800-1880

1500-1650

last month

1830-1930

1550-1750

C&F imports

1643

1500-1670

1600-1750

last month

1500-1670

1650-1850

MOA reduced its estimate of 2016/17 soybean imports by 1.5 mmt to 83.5 mmt. They also cut their estimates of soybean crush consumption. The government's injection of soybean reserves into the market will replace some imports. China's soybean production shrank to just 11.6 mmt for 2015/16 and will be up to 12.86 mmt for 2016/17, according to MOA.

China soybean balance sheet (China Ministry of Ag, July
2016)

Item

Unit

2014/15

2015/16

2016/17

Change from last month

Area

1000 HA

6,800

6,590

7,156

Yield

KG/HA

1,787

1,762

1,797

14.00

Production

Mil MT

12.15

11.61

12.86

0.10

Imports

Mil MT

78.35

82.49

83.50

-1.50

Consumption

Mil MT

89.83

95.11

98.20

-1.22

--crushing

Mil MT

77.34

81.98

84.00

-1.20

--food

Mil MT

9.15

9.71

11.18

--seed

Mil MT

0.50

0.54

0.56

--loss & other

Mil MT

2.84

2.88

2.46

-0.02

Exports

Mil MT

0.14

0.13

0.18

Inventory change

Mil MT

0.53

-1.14

-2.02

-0.18

Soybean oil production for 2015/16 was adjusted downward due to a lower estimate of soybean imports, and the 2016/17 production estimate was reduced. MOA expects rapeseed imports to fall during 2016/17 as inspection and quarantine requirements are tightened.

China vegetable oils balance sheet (Min Ag, July 2016)

Item

Unit

2014/15

2015/16

2016/17

Change from last month

Production

Mil MT

26.12

25.28

25.28

-0.10

--Soy oil

Mil MT

14.01

14.62

14.92

-0.23

--Rapeseed oil

Mil MT

6.92

5.66

5.37

0.12

--Peanut oil

Mil MT

3.03

3.01

3.08

Imports

Mil MT

6.14

5.62

5.27

--Palm oil

Mil MT

4.07

3.60

3.40

--Rapeseed oil

Mil MT

0.73

0.82

0.75

--Soy oil

Mil MT

0.77

0.65

0.58

Consumption

Mil MT

30.80

31.17

31.37

-0.01

--Urban

Mil MT

20.17

20.41

20.55

--Rural

Mil MT

10.64

10.76

10.83

0.01

Exports

Mil MT

0.14

0.12

0.13

0.02

Inventory change

Mil MT

1.31

-0.13

-0.96

-0.12

Cotton production has been adjusted upward slightly based on good rain and temperature in Xinjiang. Imports will be just 920,000 mt during 2015/16 and 950,000 in 2016/17, according to the MOA report, as China tries to unload its inventory of cotton. Cotton reserves will decline to 9.58 mmt at the end of 2016/17, down from their peak of 12.8 mmt at the end of 2014/15.

The funds will be issued to the four provinces (apparently on the basis of the amount of land planted in corn in each): Heilongjiang 11.6 billion yuan, Jilin 7.3 billion yuan, Inner Mongolia 6.6 billion yuan, and Liaoning 4.6 billion yuan. The provinces are responsible for setting up their subsidy programs. Last week, Heilongjiang released its subsidy implementation program which said the payment would be based on the amount of land farmers planted in corn this year, but it did not specify the amount of the payment. This subsidy is for the 2016/17 crop that was planted last spring, will be harvested in September-October, and sold from October through April.

Calculations based on last year's data suggest the amount of the 30-billion-yuan corn subsidy funds equal about 130 yuan per mu ($119 per acre at the current exchange rate) of corn planted in each of the four provinces.

The corn subsidy replaces the "temporary reserve" program that placed a floor under corn prices from 2007 to 2015. The "temporary reserve" price was cut about 10 percent a year ago, and a government announcement in March eliminated the program. Corn prices have already dropped since last fall and will drop further when China's new corn crop is marketed this fall. Will this subsidy be big enough to make farmers happy?

A numerical example suggests the subsidy may not be enough to fully compensate farmers for the drop in price. Suppose the corn price drops from last year's temporary reserve minimum of 2 yuan/kg to 1.5 yuan/kg this year--a 25-percent decline. That would represent a loss of .50 yuan in gross income on each kilogram of corn produced. A farmer with a corn yield of 400 kg/mu would lose 200 yuan in income from the falling price on each mu he harvests. That 200-yuan theoretical loss would exceed the prospective 130 yuan/mu subsidy. The adequacy of the subsidy depends on how much corn prices drop during the coming marketing year--a big unknown.

Corn producers outside the northeastern provinces will not get a subsidy. However, corn farmers outside the northeastern provinces were already hit with plummeting prices over the past year.

China's new subsidy system appears to be shaping up: a hefty basic payment to all grain producers (the "support and protection payment" to all grain farmers) topped up with big subsidies for specific crops (soybeans, cotton, corn, rapeseed) that are limited to the biggest production regions. Wheat and rice still receive guaranteed minimum prices as their primary means of support.

The 30 billion-yuan corn subsidy funds could equal about 20 percent
of the gross value of corn production in the four northeastern provinces
if the average corn price falls to 1500 yuan/metric ton for the 2016
crop. However, subsidy funds as a proportion of the value of national
corn output would be lower--about 9 percent--since the subsidy will be
offered in just four provinces. The actual percentage will depend on how
much the price falls, but it looks like China's new corn subsidy will be close to its
WTO-imposed limit of 8.5 percent, and could exceed that
threshold.

Farmers who plant corn in the northeastern provinces will get the corn producer
subsidy in addition to the "support and protection subsidy" paid to all
grain producers. Last month, Heilongjiang Province announced
that the support and protection payment will be 71.45 yuan per mu
($65.20 per acre), so corn farmers in Heilongjiang should get a total
subsidy of 201.45 yuan per mu ($184.20 per acre) for land planted in
corn. Other provinces have not announced the subsidy amounts. China has declared that the "support and protection payment" will be used for "soil improvements" and to fund credit programs for big farmers. This appears to be a gambit by China to declare the "support and protection" payment as a "green box" measure exempt from WTO limits, thus making room for big corn, soybean, and cotton subsidies that push up against the 8.5-percent ceiling.

Thursday, August 4, 2016

China's target price subsidy pilot for soybeans is an improvement on the temporary reserve policy it replaced, but investigations in northeastern provinces also revealed high administrative costs, plunging soybean production, "diluted" payments, and a perverse incentive to maintain production on marginal land.

Chinese authorities launched the target price subsidy pilot in four northeastern provinces in 2014. It replaced a "temporary reserve" that set a floor price for soybeans from 2007 to 2013. The target price program lets the market determine the price, then pays a subsidy to farmers based on the difference between a target price and the market price. The lower the market price, the bigger the subsidy. Authorities have hopes that the target price method can be used more widely to replace floor prices as a less-market-distorting approach to supporting farmers and stabilizing their incomes.

The MOA team praised the pilot for allowing the market to work more efficiently. Under the temporary reserve program prices were rigid, the government was forced to procure large volumes, and imports of soybeans accelerated. The target price program allows the market to determine the price. Chinese prices have fallen in line with international prices since the pilot was launched, narrowing the big price gaps that persisted during 2008-2013. Trading on the Dalian futures exchange has jumped, and processors and trading companies say they are more satisfied with the target price policy. The budgetary burden on government finances has declined (but only by about a third--MOA puts the current price tag for the soybean target price subsidy at 3.25 billion yuan--$485 million at the current exchange rate). What they didn't mention is that soybean imports have grown even faster under the target price program.

Both studies stressed the problems encountered in the implementation of the target price pilot. Both studies pointed out that soybeans were much less profitable than corn, so farmers had little interest in planting them. The MOF study reported that the area planted in soybeans in Jilin Province fell 37 percent between 2014 and 2015. In one village surveyed, 80 percent of land was planted in soybeans in 2010, but it was down to 30% in 2014, and no one planted soybeans in 2015. The MOA report agreed that soybean returns were much less than returns to growing corn.

The MOF survey criticized the Jilin program for subsidizing every single soybean grower. Payments were made in each of the province's 51 counties, including some where only a few farmers grow soybeans. Farmers got payments for plots as small as 2 mu (less than one-third acre). The smallest payment was 16 yuan ($2.40) to a farmer with 0.3 mu. Some of the Jilin farmers collected subsidies based on the area planted, but didn't sell any soybeans. Some farmers waited in vain for market prices to rebound, and never sold their beans; others just grow them for at-home use. All got subsidies if they grew soybeans.

The MOF study also surmised that a fixed payment per unit of land encouraged production on marginal land. Many soybean plots are in gullies, under trees, or on hillsides. The yield in Jilin varies from as high as 308 kg/mu in the best areas to 113 kg/mu in other areas. The MOF team thought that farmers in high-yielding areas were unsatisfied with the diluted payment per kilogram of output, and were inclined to switch their land to corn. Conversely, the high payment per unit of output encouraged farmers with low-yielding land to keep planting soybeans.

The MOA team criticized the price-collection scheme for diluting the subsidy payment. The MOA team said most market prices were collected in regions where there is relatively little production. Average prices tended to be higher in these places than prices in major production regions. When officials calculated the difference between these relatively high market prices and the target price the resulting subsidy was less than farmers expected. The MOF team also reported that farmers hoped for a higher target price, and they also mentioned that some farmers are not market-oriented and are accustomed to looking to the government to support them.

The MOA pointed out that subsidy payments are further diluted by a statistical cat-and-mouse game between local and central officials. The central government issues subsidy funds to the provinces based on the land area planted in soybeans. However, the actual land area planted is larger than the central government's statistics say, so local officials don't get enough funds to pay the full subsidy.

The MOA report says that local officials in far-flung areas of the northeastern provinces fail to report "reclaimed" cropland created by plowing up grasslands, marshes, river bottoms, hillsides, and forests. According to the MOA report, Beijing sent down funds to cover 38.65 million mu of land counted in official statistics, but provincial statisticians estimated there were 42.5 million mu of soybeans planted in 2014. So the funds had to be spread over a 9-percent larger amount of land.

Both studies also complained that the cost of implementing the target price subsidy is high. Most of the cost involves measuring fields and verifying land area. Farmers are widely scattered, so officials needed to travel and they had to buy GPS equipment. The MOA team reported that one county spent 315,000 yuan on implementing the program, and that didn't include the salaries of officials.

The two teams recommended collecting more and better information to operate the target price program. The MOF team suggested setting up a database that includes complete information on farmer land-holdings and planting. Officials were advised to combine this with activities delineating village farmland holdings by collective members which is also underway. The MOA team called for rectifying the deviation between central and local land data, and taking off-the-books land into account. The MOA team recommended shifting price collecting points to production areas.

The MOF team suggested focusing subsidies on major production regions and large-scale commercial-oriented farmers, with a minimum threshold of 2 mu (one-third acre) to get a subsidy. The MOA team recommended distributing subsidies in a more timely manner, giving half to farmers early in the season and the other half after planted area had been verified. The MOA team said the central government should also subsidize the administrative expenses, since local officials should not have bear the cost of a central government subsidy program.

The researchers urged officials to consider carefully the relative returns of soybeans and corn. The MOF team suggested "guiding" farmers to rotate soybeans with other crops instead of mono-cropping corn. Separately, a Heilongjiang professor recommended including spring wheat in northern Heilongjiang in the national minimum price program for wheat to encourage soybean-wheat rotations.

This is the second year of the target price pilot program, yet there are still a lot of kinks to be worked out. More troubling, the program led to an even steeper drop in soybean production and it preserved production on marginal land. The fundamental problem is that competing crops--corn and rice--each had support prices. If the soybean subsidy had been raised enough to keep soybeans as profitable as corn, the program might have cost as much or more as the "temporary reserve" program it replaced.

Officials are preparing to roll out a corn subsidy program that has been drawn up on the fly, is completely untested, will be much larger, and will receive much more scrutiny than the soybean pilot. This new corn subsidy will make the relative returns of soybeans and corn even more uncertain. When new problems arise, more bells and whistles will need to be added.

Once they get started, farm subsidy programs have an uncanny knack of turning into a Rube Goldberg contraption that no one really understands.

With Heilongjiang's grain inventory at a record high, it is urgent to make room to procure the new grain harvest coming up in a few months. Officials worry that dissatisfaction will spread if farmers are unable to sell their grain.

The meeting had four main recommendations.

Make great efforts to construct integrated grain processing and storage projects to absorb grain.

Push forward policies to develop dairy, beef, hog, and poultry production in Heilongjiang to boost the demand for feed grain.

Take advantage of the upcoming annual meeting where leaders from various provinces negotiate on grain purchases and sales to move as much grain as possible to other provinces.

According to the news report from Hainan, the grain officials came up with all sorts of accounting chicanery to steal money meant for purchasing and maintaining grain reserves. Several tricks were used to inflate subsidies for rotating grain reserves. Six granaries conspired to sell old grain as new grain, thus collecting subsidies for acquiring new grain. Other grain rotation schemes referred to as "air for air" and "bring in a little, add a lot" suggest trading nonexistent grain and inflating reports of grain procurement. The cheating on grain transactions cost the government 13.25 million yuan (about $2 million) in fraudulent subsidies involving 130,700 metric tons of grain.

This article from a distant corner of the empire was widely posted on web sites, perhaps a shot across the bow to warn grain reserve managers all over the country. The National Grain Bureau is planning a nationwide check-up of accounting and statistical reporting for grain enterprises from August to October. The activity will check to ensure accounts are timely, accurate, and complete; look for false reporting of grain information; and make sure that past instances of fraud have been included in "honesty records" of perpetrators.

The widespread fraud once again reveals the fallacy behind the efforts to build a Chinese "national team" in the grain marketing industry. There is no reason to expect that managers of state-owned companies will be more inclined than managers of foreign companies to act in the national interest of China.